The Bank of England shocked investors Thursday for failing to secure a rate hike, which could be a signal of what might be a signal of what will happen as central banks around the world are carefully working to balance inflation and growth risks.
On Thursday, a 7-2 vote against the tightening of the policy resulted in a 1.5% drop in the pound and a jump in government bond prices, while money markets, which saw a second rise before the end of the year, postponed their rates until February.
Peter Kinsella, head of Switzerland’s private bank UBP, noted that monetary policy may not do any harm to inflation in the near future, and long-term inflation expectations have risen relatively less. Events show that the Bank of England has a big communication problem.
Other Banks Also Have Trouble
The Bank of England is not the only central bank to have had the wrong markets in recent days and is accused of confusing messages. Financial Australia – central banks – hold – interest rates fall – yield target of 2021-11-01 stood last week as markets lifted their 1% yield target on 3-year bond yields. The target has been withdrawn and the agreed rates may increase until the previously scheduled 2024 date.
In his address, UBP’s Kinsella said yields on eurozone bonds rose after the European Central Bank announced that eurozone bond yields rose. Markets are having a hard time reading for central banks as the economy recovers from COVID-19 and some central banks adopt more flexible inflation targets. The Bank of England is not one of them. There are expectations for prices for 13 years.
Inflations Soar
Global inflation expectations in the UK were the highest since 2008 before the rate decision was made and annual inflation was 4.25% by the end of 2021 and money markets were up 15 basis points by this week and another 25 bps next month. There is much more uncertainty about the reactionary function of central banks. So far, there has been no conflict – they still supported growth because inflation was not an issue.
In terms of Forex trading UK is one of the leaders and inflation is directly connected with the latter. Inflation trade is a concept broadly considered when investors believe there is risk or potential to gain from rising price inflation. Many British investors will rotate their portfolios into assets generally more favorable in an environment where inflation persists.
Financial investors have been deceived by the Bank of England and its colleagues. Communications and the bank’s economic data were at odds with the ECB’s interest rate hike in July 2022. Some analysts said market prices for the Bank of England tightening on Tuesday were exaggerated by technical factors, while others said traders had misinterpreted the recent policy comments
What is the Essence of the Bank of England?
The Bank of England, like the central banks of other countries, is currently at the center of financial and economic changes, requiring them to make new efforts to adapt to changing conditions. This necessitates fundamental changes in their functions, organization and technology, as well as a radically new approach to interbank cooperation and international cooperation.
The Bank of England has formal independence from the government, although it works under the leadership of the Ministry of Finance. The term of office of the Governor of the Bank of England does not depend on the government sienna. The Bank of England has to fulfill a very difficult role in exercising control and regulation of the monetary sphere. The related functions involve the Bank in the orbit of national economic policy, where, in addition to deep professional knowledge, skillful political maneuvering is required.
The range of considerations behind each of its steps is invariably expanding and often contradictory: the interests of domestic monetary policy are in conflict with the tasks of stabilizing the pound sterling; financing the budget deficit by issuing new loans undermines the government’s anti-inflationary efforts; control over the volume of loans runs counter to stimulus competition among banks, etc. Nevertheless, in England, monetary methods of regulating the economy remain among the most important instruments of state monopoly intervention, and the role of the central bank in them is especially significant due to the fact that there are practically no influential credit institutions in the country, owned by the state.
The first goal of the central bank is to maintain the value of the national currency. Monetary policy is designed to help stabilize the real value of the monetary unit. In the UK, monetary policy is carried out mainly through the regulation of the interest rate. Currently, the concept of “stable price level” in many countries is filled with practical content. In most of them, stabilization is associated with very low inflation. In the event of a destabilization, all the blame should not be attributed to poor or virtually nonexistent monetary management. The reasons, as a rule, run much deeper. So, in the early 70s, the goals of short-term stabilization and price stability came into conflict under the influence of the oil crisis.